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Making Childcare Affordable

From top:Taoiseach Leo Varadkar with Minister for Children and Youth Affairs Dr Katherine Zappone; Last Sunday’s Sunday Independent; Michael Taft

The Sunday Independentdevoted three pages to the escalating cost of childcare. This was based on a Departmental document made available to the paper, along with a new Eurostat study and an analysis of childcare affordability from Ciaran Nugent of the Nevin Economic Research Institute. It tells the same story that I canvassed late last year – that rising childcare fees are cancelling out a substantial portion of the new €20 per week subsidy.

I don’t intend to go over the arguments first made in this post written when the new scheme was announced. However, I will restate the main point: as long as childcare services are run on a stand-alone basis – whereby each provider must raise enough money (primarily from parents) to meet their costs – affordability will be elusive.

Any attempts to subsidise the service will lead to fees inflation as services seek to increase investment with the additional payment – as is happening now.

Here I’d like to outline an alternative programme of affordable and quality childcare, working from where we are now. Ideally, childcare services should be a public sector activity as it is in other countries where municipal services play a lead role. However, public sector intervention is not likely in the short-term. We need to work with the 3,700 services currently providing early years’ service.

Each service would be invited to participate in a national network operated by a dedicated public agency. This agency would oversee the quality of each service and provide general operational guidelines, allowing for flexibility so that services can match local needs.

The key incentive to participate in this network is that the agency – funded through the Department of Children and Youth Services – would directly pay employees’ wages and social insurance costs. This could dramatically reduce fees.

According to the detailed 2007 Deloitte study of childcare costs (a bit out of date but the proportion of costs should remain the same), employee compensation makes up 67 percent of childcare expenditure. This shouldn’t be surprising – caring for children is very labour-intensive. If the public agency takes over this cost, this would reduce childcare fees by two thirds.

On average, childcare fees would fall from an average of €179 per week to €58 per week, saving parents €525 per month.

That savings would be a real benefit to families’ living standards, increase women’s participation in the workforce and boost consumer spending in other non-childcare businesses: win, win, win.

Taking over employee compensation would remove the main upward pressure on childcare fees. Services need to pay higher wages to reduce staff turnover (which is approximately 30 percent resulting in high recruitment and training costs) and attract higher-skilled people.

Workers in the sector would be able to negotiate collectively with the agency – covering not only their wages, but their working conditions (full-time contracts, up-skilling, pensions, etc.).

In other words, we could start to professionalise the sector.

The cost would not be as much as might be imagined. Using the recent Pobal survey of the Early Child Services sector we find there are 23,000 employees in the sector, half of which are full-time. If we assume 20,000 full-time equivalents (this is probably on the high side but let’s try to find the highest possible cost) at the average hourly pay of €11.93 the cost to the new public agency would be €484 million. If we immediately increased pay by 20 percent across the board, the cost would rise to €580 million.

Though this is just a back-of-an-excel-sheet estimate, the gross cost would replace a significant amount of current expenditure which, in 2016, amounted to approximately €225 million for the full Early Childhood Care and Education programme. The net cost, therefore, would be less. This would still leave Ireland well down the table in public spending compared to other EU countries.

Is childcare affordability affordable?

Even if we were to take €580 million as the final cost, we could easily fund this out of the current fiscal space.

The Government projects it will have €10 billion available over the next three years, of which €3.3 billion is earmarked for tax reductions.

The proposed cost would make up less than 18 percent of the proposed tax cuts. Wouldn’t this be a better use of limited resources?

There are a number of issues that would still need to be teased out:

1) Would for-profit services be admitted to this network (granting as a subsidy to private profits)

2) Would there be provision for capita payments – similar to primary schools

3) Would the public agency or local authorities be enabled to provide childcare services directly in areas of low supply

These and other issues would need to be addressed but locating these within a public sector-led national network makes it easier to deal with affordability, quality, supply and access.
We have the need, we have the resources. But the first – and main – decision we need to make is political.

Michael Taft is an economic analyst and author of the political economy blog, Notes on the Front.

35 thoughts on “Making Childcare Affordable”

He explains in the piece
Creche owner no longer paying out wages, creche owner can reduce incoming fees
I assume there would be a stick of some sort in the process in order to ensure these savings were passed on

Yes but with more people working and more expendable income to spend in other areas, a portion of that figure could well be reduced by the increased VAT and income tax take. And anyway, most people will have to pay for some form of childcare over their lifetime so think about it as spreading the cost over your entire working life rather than one extremely burdensome payment at a time when most people are pretty strapped already.

Cian, most progressive countries fund childcare through general taxation. Having children isn’t just some vain folly or indulgence on behalf of parents — children become the future tax payer who will pay for pensions, healthcare etc for the future older population, the same people who are funding their child care today.

Fact Checker and Rob_G: I’m not sure where the criticism comes re: contribution. I haven’t proposed a free service like primary education. Parents would still be making a financial contribution. And, yes, there can be sliding scales – especially at the lower end where even €250 per month would be onerous. Ultimately, though, I don’t think there are too many people ‘happy’ to pay €179 for weekly full-time childcare – rising to over €200 in Dublin.

I do take the point re: PRSI. That would increase the gross cost by €63 million – though as I emphasized, this is not the net cost after recouping current spending. And it wouldn’t affect the simulated reduction as this is based on employee compensation in the Deloitte model.

Ultimately, this is about investing in children’s’ services while increasing labour force participation and reducing family costs.

Thanks Michael, and apologies if I misunderstood elements of the model.

Increasing labour force participation is a noble goal. However this kind of policy needs to be very carefully targeted to be effective. Specifically at women who face very high marginal effective tax rates for returning to work (combined effect of income tax, loss of partner’s tax credits, and childcare costs).

Your proposal would not be targetted at this group at all, leading to large deadweight losses.

Would there not be an increase in people using these services if the cost reduced by two thirds? There are people that can’t currently afford to send their kids to care – this would increase the need for care.

You also say that this will cost €580 per year (€1.74bn over 3 years)… There is 10bn fiscal space over the next 3 years…3.3bn is tax cuts.

They you say this is 18% of proposed tax cuts – surely it is either 18% of the 10bn total OR over 50% of the proposed tax cuts.

presumably if people can afford to put kids in creche they will join the workforce and increase the tax take but i’m guessing the net cost is still a bit higher that outlined in the article

It’s a worthy idea that needs more investigation and testing as it looks like it could just lead to spiralling wages and inefficiency at the cost of the taxpayer. What would happen to many of the owner-operators of well run creches at the moment? do they become paid managers and also take a profit share?

b – the above model does not undermine the status of owner-operators (depends on the design). But most owner-operators exist on very thin margins and low wages/income themselves. Under this model, there would be more regulation, yes, but there is provision for pay/income increases. And there’s the possibility of gaining from shared public procurement within a network (food, equipment, administration).

For homecare versus childcare choice to be a financial decision the cost must be relatively close to the forgone income. If it costs €200 per week, that’s €10k per year (we’ve family & friends in Dublin all paying €350 / week). For work not to be financially rewarding, it suggests that the stay at home parent would only be earning in and around the €10k range (probably slightly higher).

A €10k earner pays virtually no income tax. Even if you flex it for a high earning spouse (so their marginal rate is 51%) they’re only making about €20k so they’re not going to pay meaningful amounts of tax.

Thanks for that, Cian. Yes, there would probably be an increase in demand under such a new regime – but it is difficult to know how much. But that would be an additional expenditure. However, this would be assessed differently. Under the proposal above, the government is taking over wages already paid and already receiving tax revenue, with the same economic benefit such as demand. With additional demand comes new jobs being created, with new tax revenue and new demand. During the recession we could give measure this approximately, but now that are in growth with much lower unemployment, we would need new multipliers to be published (which hasn’t been done). All this to say, any additionality would be less costly but should not constitute a drawdown on the fiscal space; it should be balanced by reduced tax cuts.

As to the fiscal impact: if the Government increases spending (or cuts taxes) by €1 million in year 1 but keeps that constant in subsequent years – the increase is a once-off. If you want to calculate this cumulatively then, yes, the €586 million would cost €1.7 billion over three years. But so would a tax cut of that same magnitude.

Mourinho – yes, that is possible. That’s why it would be preferable if childcare was provided directly through the public sector like it is in so many EU countries (usually through local governments) – just like primary education. But a network would at least be public sector-led. Operational guidelines could set limits on surplus revenue. And the prospect of more community-based and even cooperative providers entering the system could help. There is no simple solution – but by removing employee compensation from household fees, we are in a stronger position to obtain affordability.

Government rush to announce this type of thing to get short-term gain. Within days, weeks or months, the actualities (which they know of actually) become clear. At least when FF gave out goodies in the 80s and 90s, there was a real benefit to the receiver.
The FG model is for private industry to reap the rewards.

For homecare versus childcare choice to be a financial decision the cost must be relatively close to the forgone income. If it costs €200 per week, that’s €10k per year (we’ve family & friends in Dublin all paying €350 / week). For work not to be financially rewarding, it suggests that the stay at home parent would only be earning in and around the €10k range (probably slightly higher).

A €10k earner pays virtually no income tax. Even if you flex it for a high earning spouse (so their marginal rate is 51%) they’re only making about €20k so they’re not going to pay meaningful amounts of tax.

Im a recent single parent, certainly not by choice, I am desperately trying to find a job full or part time and have contacted 100’s of creche, I’ve asked first if they had a space for my daughter and been told yes by only 2 and then when I mention the affordable childcare scheme I’ve been totally ignored, by email, phone calls and personal visits

We are paying property taxes to local government now, so is there a case to be made for introducing a schools tax as a proportion or in addition to LPT?
I remember paying a Schools Tax in New York when I bought a house there. It was linked to my Real Estate Taxes(County Tax) and administered by the county administration, separate to my Federal Tax, State Tax, Medicaid and Medicare Tax(Prsi), City Tax, Water Tax, Sanitation Tax and Federal Flood Insurance.

As Gringo says, get an au-pair, will save you in the long term on medical bills alone ;)